Elena Quarestani was 18 when she met Salvador Dalí at his suite in Le Meurice hotel in Paris in the 1970s. Her family owned one of the Spanish surrealist’s early works – a portrait of the painter’s sister called Figure at a Table – and she was hoping he might embellish the painting with some surrealist flair to make it closer to his later work.

“It was an amazing situation. He had a TV set but it was upside down,” Quarestani said recently. The Italian, who now runs a not-for-profit organisation in Milan that is focused on the visual arts, remembered the artist wearing a red velvet robe and being surrounded by young acolytes. Dalí did not agree to alter the painting in the end, probably because she couldn’t meet his asking price, she recalled.

More than three decades later, the happy memory of her brief encounter with one of the most recognised artists of the 20th century has been overshadowed by a far less glamorous affair: a legal fight that has been going on for years with the Italian government, which has prevented Quarestani from selling the painting.

Under rules that were first established in 1909, local officials in Milan have claimed that the portrait should be protected as a piece of Italian cultural heritage. That assessment has given the government the right to block an attempt by Christie’s, the auction house, to sell the painting for Quarestani. It also blocked an offer by the Dalí Foundation to acquire the work, which is valued below £500,000.

“The reasoning was absolutely crazy,” Quarestani said. The government’s rationale, according to her, was that the portrait was “very beautiful”, that it was rare for a work by Dalí to be held in a collection in Italy, and that the portrait appeared to be inspired by an Italian art movement called Valori Plastici – an opinion that Quarestani thinks is dubious.

Soft Watch at the Moment of First Explosion, by Salvador Dalí Photograph: Christie's Images/Corbis

Quarestani is not giving up the fight, mostly as a matter of principle. With her lawyer, Giuseppe Calabi, who also works with major auction houses, Quarestani is trying to bring the issue before the European court of justice, in order to determine whether Italy is defying EU rules that guarantee the free circulation of goods.

“Dalí was not an Italian painter. This is not our patrimony. And look how they do take care of our patrimony. Look at Pompeii, look at the state of the Accademia di Brera in Milan,” Quarestani said. “Also I think I should have the right to sell this painting wherever I want.”

As it turns out, Sotheby’s, Christie’s and a host of other auction houses and art traders, strongly agree. They are backing a controversial lobbying push in Italy to change what they see as draconian and “unjustified” rules that have hindered the Italian art market.

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Under current rules, a piece of art that is in Italy and more than 50 years old must be approved for sale and export by local Italian art authorities if the artist is dead. If the work is deemed to be a matter of cultural interest, its sale can be blocked. Unlike other EU countries, the value of the work or object – be it a multimillion-euro Modigliani or a set of designer coffee mugs worth less than €10,000 (£7,000) – is irrelevant.

The auction houses sought to convince the government that only works that are older than 100 years ought to require government approval to be exported. Critically, that would allow works that are currently in Italy that were produced after 1915 to evade any review. That would in theory free up paintings like Amedeo Modigliani’s famous nude, Nu Couché, which was sold to a Chinese billionaire for $170.4m (£113m) by Christie’s in New York earlier last month. It was painted from 1917 to 1918.

The auction houses’ plan has largely been endorsed by the government of Matteo Renzi, with one big exception. It wants to set the age limit for artwork at less 70 years. That means people who own art in Italy that was produced after 1946 would not have to seek approval for sales outside the country once the proposal is passed, which is expected to happen next year.

“The market is very much expecting this reform to pass,” Calabi said. The attorney said he believed the change would allow auction houses like Sotheby’s and Christie’s to offer more work by certain Italian artists, including Agostino Bonalumi and Lucio Fontana. “Work by Italian artists will become better known abroad,” he said. “Italian work will also be better represented in American museums.”

Not everyone believes the expected overhaul is a good thing. “The changes evoke serious concerns,” said Emanuela Daffra, the director of the local culture ministry in Milan.

She noted that, if the auction houses had their way, nearly all the later works of Modigliani and other works of the 20th century would be allowed to leave the country without any restrictions. “It would affect permanently the possibility of securing these works for public use in Italy, as has already occurred for key works of the avant garde era. It would be appropriate not to repeat that mistake,” she said.

Dalí in Cadaqués, Spain, in the 1950s. Photograph: Sipa Press/Rex Features

Daffra is also critical of any change that would take a work’s value into account. Under the auction houses’ proposal, any work worth less than €150,000 would not require approval for a local government authority to be sold abroad. “Introducing a commercial value as a criteria is not objective and hard to verify because it linked to the market. [In] the Italian system of protection [what] matters is the cultural and historical significance,” she said.

While Daffra does think some reforms would be appropriate, like making the local-level decision-making more uniform across the country, she has launched an online petition that urges the government to “reflect before accepting a unilateral proposal that is very dangerous”.

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Calabi said some Italian art owners were so wary of Italian regulations that they declined to lend their work to museums outside of Italy for fear that they could be subject to a ban – a phenomenon he said affected the Guggenheim’s Italian Futurism exhibition last year. “The most important works were not loaned by prospective Italian owners because they didn’t want to show the work to the public and alert Italian authorities and perhaps be subject to a ban,” he said.

The Guggenheim denied that claim, saying that no works it sought for the exhibit “were blocked and no collector refused to lend”. But one Italian expert in modern art who asked not to be named challenged that assertion. “Museums don’t always admit to this problem. But an expert in futurism can tell you that some of the important pieces of the era, which are located in collections in Italy, were missing from the exhibit,” the person said.